Depending on the criteria you use, investments can be grouped in several different ways. From a returns perspective, you may invest in either growth or income producing investments. What distinguishes the two? What are some examples of each? Most importantly, which ones should you invest in to meet your financial objectives? Let’s explore below.
A growth investor primarily invests in instruments expecting them to appreciate and then sells them at their highest possible value. Therefore, his or her focus is on capital appreciation. Such individuals look for assets that are likely to exhibit rapid growth in revenue, profit or capability, all of which result in higher value in the future.
In some instances, growth investments can also provide an income. However, the income itself is not the main objective of investing; it’s an extra perk. Unlike income investing, the growth investor must sell assets to produce income
Mutual funds, which let you invest in a variety of stocks for a low initial investment are an example of a growth investment. Exchange traded funds (ETFs) are another example. They pool funds from individuals to buy securities. Stocks are some of the most common growth investments which can also produce an income via dividends if they are held for long periods of time. Other examples of growth investments include currencies, commodities and precious metals.
Like their name suggests, income producing investors are generally interested in creating the highest possible, constant income stream within the investor’s risk appetite. It typically comes in the form of monthly interest, quarterly returns or dividends, or rent payments.
For the investor’s needs to be met, the income needs to be steady and predictable. Commonly used income-producing investments include bonds, real estate investments which yield a rental income, dividend stocks, REITs and business ownership.
Which Should you Invest in?
The choice between growth and income producing investing boils down to your investment objectives and risk appetite. Those with a desire for passive income as well as a low risk appetite may be drawn to income investing. Similarly, individuals wanting their portfolios to increase in value quickly and have a higher tolerance for risk show a preference for growth investing.
Crucially, it doesn’t have to be an either-or decision. You can choose a hybrid investment strategy or invest in a fund that does. This gives you the best of both worlds, allowing you to get a current income, and benefit from future dividend increases and asset appreciation.